Market Update – October 24, 2017

Market Update – October 24, 2017

Important week ahead of us with the ECB (European Central Bank) poised to announce changes in the structure of its bond-buying program. While the Eurozone economies are nothing short of experiencing a healthy bounce, the ECB is reluctant to end the easing abruptly.

When the Federal Reserve of the United States ended the quantitative easing program, the taper tantrum created much of damage in the emerging markets. As such, the ECB wants to avoid making the same mistake, hence the gradual reduction.

Tapering or Not Tapering?

It is expected the ECB to announce a further reduction of the bond-buying program, from the current 60 bln/month to somewhere in the 30 bln/month area. However, last time when the ECB reduced the size of the program, it extended the period too.

Therefore, some argued that the tapering started. After all, from 80 to 60 we can say the ECB scales down.

Yet, the ECB argued that it eased further, as it extended the program for a further nine months.

The same may happen this week. While the central bank may reduce the bond-buying program, it may extend the period for a further six or nine months.

Like last December, the question on everyone lips would be if indeed the ECB tapered or not. Of course, the market’s volatility will be on the rise and trading algorithms will go for as many stops as possible.

The U.S. Dollar and the Next Fed’s Chairman/Chairwoman

The big question on the monetary policy in the United States is whether Yellen will continue with another term as the Fed’s Chairwoman.

It is difficult to imagine someone in the right mind even considers replacing Yellen when the stock market is at all-time highs even if the Fed is in a full tightening cycle.

Moreover, the jobs market looks stable and poised to improve further.

When it comes to the new U.S. administration, it is unlikely that Yellen will continue. One needs to remember she’s the legacy of the Obama’s administration and Trump won’t resist replacing her.

Whether the potential replacement is priced or not in the market, it remains to be seen. All we know is that in about a week from now the appointment will be public.

Conclusion

Euro waits for the ECB decision and the best market to reflect that is the EURUSD. Even today, the U.S. Dollar is up virtually against all currencies, with one exception: The Euro.

It put a substantial bid behind the Euro crosses, with more potential in case the ECB’s actions won’t be dovish. Perceptions matter the most in FX trading, and this coming Thursday Euro traders will be tested the most.

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